Recording NPN in QuickBooks

[Joshua Scott]

Good evening. I’m trying to teach myself QuickBooks online even though I have a CPA. I want to learn and understand my own books just like someone understanding their own car. So those that have been in the business, how would one record a purchase on non performing note in QuickBooks online. I have it set up with address as name and other assets. The purchase is recorded as an expense. Is this correct?

[Bill B.]

@Joshua Scott

As stated above, the purchase is an asset.

When you write the check in QB, you establish the asset.

The bookkeeping entry is

debit 123 Anywhere St NPN

          Credit cash

Each payment recd is split. That split can be complex based on several factors. Do you have an investor? (Having an investor can ALSO change the entry above to record the purchase)

To keep this post simple, no investor in this example. To determine the split, you need to create an amortization schedule for the note using: (in this simple example...this also can change for many reasons)

the outstanding balance of the ORIGINAL NOTE,

interest rate OF THE ORIGINAL NOTE, NOT your calculated rate

Number of payments in the ORIGINAL NOTE.

Now, you fast forward through ALL your loss mitigation (completely separate bookkeeping issues and set up issues there) and YOU GET A CHECK from the borrower. 

YAY!!

Run to the bank and deposit it while it is still good!!

When you get back home, find the payment just received on the amortization schedule created. Hint: the "balance" on the amortization schedule should match the UPB purchased (excluding late fees, and any other funds owed outside the actual note) AND be the line item with the correct number of payments remaining.

Using that line on the amortization schedule, complete the deposit in QB with the following entry:

Recognize the reduction in the asset (the account/class/whatever QB calls it noted in the purchase noted previously) by the principal amount shown on the amortization schedule,

recognize the interest income using the same line on the amortization schedule to a new and separate account “123 Anywhere St Interest income”,

the remaining is “gain on payment receipt” of the note and should be recorded in a new and separate account “123 Anywhere St Gain on monthly pmt rec’d”

The bookkeeping entry is

Debit cash

Credit the other accounts noted above.

If debits and credits don’t equal, an error in the entry must be resolved. 

Again, an investor changes things. Receipt of outstanding late fees changes the entry. There are others issues that may change the entry.

To get a full grasp of the bookkeeping  (which is far different than learning QB) I’d suggest a class or two at the local community college. 
If you take a course and it doesn’t “click” don’t be discouraged, because double entry bookkeeping is a different way of thinking.

Disclaimer: 

I’m NOT a CPA. (No Enron, Worldcom, Healthsouth, Bernie Madoffs, etc, etc, etc, etc, in my past.)

Finally, The “best and brightest” in DC mess with simple concepts frequently to maximize taxes on those with insufficient resources to mount an effective lobbying effort...so for reasons they alone can fathom, something above may have been arbitrarily deemed illicit. Proceed with appropriate caution.

I truly hope this is helpful.

If anything above is untoward, please disabuse me of my wayward notions; I beg pardon and penance.